Kentucky lawmakers seek progress on fixing state pension system

Framework for reform sought by session's end

Jan. 27, 2013

Democratic state Rep. Brent Yonts of Greenville signs legislation on Friday, Jan. 11, 2013, on the House floor in the Capitol at Frankfort, Ky. Yonts was chosen Friday as chairman of the House State Government Committee, which will be working on a financial fix for Kentucky's government pension system that has a $33 billion unfunded liability. (AP Photo/Roger Alford) / AP

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Pension legislation at a glance

Intent: Pending legislation in the House and Senate would seek to shore up the state pension system by requiring full funding from state government and reforming benefits for new hires. Key players: Senate Majority Leader Damon Thayer, R-Georgetown; Rep. Brent Yonts, D-Greenville and chairman of the House State Government Committee; the Kentucky Public Pension Coalition, a group of public unions and advocacy groups. Supporters say: The state pension system is facing a financial meltdown and the proposed reforms would secure retirement benefits for workers and retirees while providing a more affordable plan for new hires. Opponents say: Kentucky doesn’t have the money for full funding and that moving to a hybrid cash-balance plan would drive up administrative costs, decrease recruitment incentives and leave workers at the investment market’s mercy.

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FRANKFORT, KY. — Overhauling the troubled state pension system is a complex task mired for years in partisan fights over funding and policies. But with the system in financial meltdown, many lawmakers at least hope to have a framework for reform by the end of the 30-day session that resumes Feb. 5.

If legislation fails to pass in 2013, “the public is going to say we failed, and they are going to be awfully upset because that is a major issue,” said Rep. Brent Yonts, a Greenville Democrat who heads the House State Government Committee.

At issue is the future of Kentucky Retirement Systems, which faces more than $18 billion in unfunded liabilities. The system covers close to 325,000 members and has grown increasingly unstable over the past decade thanks largely to underfunding by state government, investment losses in the sour economy and repeated benefit enhancements.

Majority Republicans in the Senate are likely to support a reform package that would require full funding of the retirement system, repeal annual cost-of living adjustments and create a more market-based pension plan for new hires.

But while public unions and retiree groups strongly support a full-funding approach, they oppose closing the state’s defined-benefit plan to new employees and repealing the cost-of-living increases.

At the same time, it remains unclear if House Democrats will back a bill without a dedicated revenue stream to pay annual retirement contributions, which could jump by more than $300 million in the first year of reforms. Some Democrats also are uncomfortable repealing benefit adjustments rather than just suspending them until more funds are available.

House Speaker Greg Stumbo and Senate President Robert Stivers have tempered expectations early. Stumbo has suggested a special session to deal with the issue alongside tax reform, but says he is open to tackling the matter in the regular session so long as reforms and funding are addressed together. Stivers, while citing pensions as a top issue, says he at least hopes to have a framework for reform when lawmakers adjourn.

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But Senate Majority Leader Damon Thayer and Yonts plan to file bills in both chambers when lawmakers return in February based on recommendations for state government to fully fund the pension system by 2015.

And Gov. Steve Beshear said Tuesday that although he’s not certain lawmakers can resolve funding and policy issues in the regular session, “we must take action before we build a budget next year.”

Reform proposals

The bills proposed by Thayer and Yonts would increase the state’s contribution to the largest retirement plan for state workers from $505 million in 2014 to $832 million the next year and require higher payments through 2020, when the state would begin to realize savings.

The bills also would replace the state’s defined-benefit plan with a hybrid cash-balance plan for new employees, combining elements of traditional pensions with the 401(k) approach used in the private sector. Cash-balance plans transfer more market risk to workers, but the state would guarantee a 4 percent annual return.

A third key element of the proposed reforms would involve repealing the automatic 1.5 percent cost of living adjustment and mandating that future adjustments be funded at the time of approval.

A legislative task force crafted the proposals last year, and Thayer, R-Georgetown, said the task force worked specifically to create bipartisan recommendations that could win support in both chambers.

“I don’t think there is anything in the recommendations that are totally objectionable to anybody,” he said.

Yonts said he hasn’t spoken with enough House members to know what changes they might demand, but he noted that passing reforms will be easier now than in 2014, when lawmakers must also write a budget.

Stumbo and others in the House have indicated that finding a funding solution remains the main obstacle to passing a bill and Beshear said he refuses to redirect money from other critical areas like education. But Stumbo said Friday that a dedicated funding source is not a prerequisite to reform.

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If lawmakers can fund the annual contribution without harming low- and middle-income families and create a more sustainable plan for future employees, “I think we will have met the mandate the task force laid out,” he said.

Thayer argues that lawmakers can show intent in this year’s legislation and work out a funding deal while writing the state budget next year.

He points out that the General Assembly used a similar approach in pension reforms from 2008 that established a phased funding approach through 2025 but did not designate a funding source.

Two other lawmakers — Rep. Tom Riner, D-Louisville, and Rep. Dennis Keene, D-Wilder — have filed bills to address the funding problem, but neither effort has close involvement with House leadership. Riner’s legislation would use tax revenue from cigarettes and rolling papers to help pay contributions, while Keene’s bill would tap revenue from expanded gambling.

Some House Democrats also view pension obligation bonds as a way to help resolve the problem, but bonding is unpopular in the Senate.

Unions oppose
hybrid plan

Both Stumbo and Beshear seem open to using a hybrid cash-balance plan, despite opposition from unions and past concerns in the House about moving to a 401(k)-style retirement system.

Proponents say a hybrid plan would lower the cost and financial risk to the state while still providing retirement security to workers. But opponents say the approach would add administrative costs, decrease recruitment incentives and leave workers at the market’s mercy.

“We don’t see any support among our folks for a cash-balance plan,” said Jim Carroll, co-founder of Kentucky Government Retirees. “If they come out of there without increasing the required contribution, they have done nothing useful to address the issue because the pension issue is the unfunded liability.”

The Kentucky Public Pension Coalition, a group of about 20 unions and advocacy groups, also cites funding as the top issue, while opposing the cash-balance plan.

Coalition coordinator Steve Barger said the group and its individual members are discussing those concerns with lawmakers. “It’s education, it’s engagement and yes, we fully intend to get the message out there by whatever means are necessary,” he said.

Still, Sen. Joe Bowen, an Owensboro Republican who chairs the Senate State and Local Government Committee, said he believes legislators can hammer out a compromise in the regular session.

“I really think that if we don’t get a bill passed, we will at least have something in hand that will be pretty much push-button from that point,” he said.

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Courier-Journal reporter Darla Carter manages "In The Prime," a collection of news, features, videos, data and blog posts designed to help you thrive as you age. A longtime writer of the Thursday Health & Fitness section, Darla will find and post stories, blogs and news items every day on health, fitness and nutrition – all intended to help keep you and your family healthier. She is a Louisville native and graduate of Western Kentucky University.• Contact Darla with story ideas or feedback